Reducing local restrictions on housing development

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Administration and Finance Housing and Community Development

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Environmental Affairs
No. 5. January 31. 2000

Reducing Local Restrictions on Housing Development

Argeo Paul Cellucci

governor
Jane Swift

lieutenant governor

UMASS/ AMHERST

3120bb 0270 77ST 1

Andrew S. Natsios

secretary

Jane Wallis Gumble

director

Robert Durand

SECRETARY

Executive Summary

Since 1996, housing costs in the Commonwealth
have risen at a rate above the national average.
Yet housing supply growth appears to be
stagnant. Permits for new housing units remain
at about their 1994 level and net new growth in
single family parcels between 1992 and 1998 is
flat at about 12,500 per year.

The new housing that is being built tends to be at
the higher end of the market, and the number of
multi-family developments is actually declining.
This decline in multi-family developments
exacerbates the affordability issue, particularly
since renters typically have lower incomes than
owners, and also means development is less
dense and more likely to lead to urban sprawl.

While the growth in housing costs is nowhere
near the level it reached during the speculative
boom of the 1980s, greater gains in housing
supply are necessary to moderate the current rise
in housing costs and avoid even greater spikes in
the future. Without additional supply, housing
costs may continue to accelerate, imposing a stiff
burden on Massachusetts renters and
homebuyers as well as decreasing the state's
overall economic competitiveness.

Despite the need for more residential
development, many communities resist
increasing the supply of housing within their
jurisdictions because they fear revenues from
new development will not cover the costs of an
influx of families and schoolchildren. Lessening
this fear and encouraging Massachusetts
localities to permit more residential development
is potentially among the most effective methods
of increasing housing supply for the following
reasons:

> Current Restrictions Raise Housing Costs:

Studies by several economists, including
Anthony Downs of the Brookings Institute
and William Fischel of Dartmouth College,
indicate that local regulation increases
housing prices by as much as 30%-50%.

> Local Zoning Regulations Can Severely
Limit Potential Development: Some
Massachusetts cities and towns are
restricting housing development to the point
that new development requires an average of
twice as much acreage per unit as existing
development.

> Current Zoning Laws Pose a Threat to the
Environment: Failure to loosen restrictive
zoning regulations will not only increase
housing costs and imperil the state's
economic expansion; it will also push
development farther away from urban
centers and thereby increase sprawl.

To help communities bear the costs of further
low- and moderate-income housing
development, the Cellucci/Swift Administration
has issued an Executive Order giving
communities that take steps to encourage
residential development priority for discretionary
grants. The Cellucci/Swift budget proposal for
fiscal year 2001 also redirects nearly $50 million
of $476 million in Local Aid known as
Additional Assistance toward communities
where low- and moderate-income residential
development occurs. These funds will help
offset the financial burden residential
development imposes on communities.
Together, the Administration's actions should
ameliorate community concerns about more
residential development, provide private
homebuilders with more opportunities to
increase housing supply, and help moderate the
current acceleration in housing prices.

John Simon and Rebecca Rissman of
Administration and Finance performed much of
the research and analysis for this brief. They
were assisted by Robert Costrell and Pamela
MacLeod of Administration and Finance, Carlo
DeSantis of Housing and Community
Development, and Kurt Gaertner of
Environmental Affairs.

^

Administration and Finance
Policy Brief Series

Housing and Community Development

Environmental Affairs
No. 5, January 31, 2000

Reducing Local Restrictions on Housing Development

Since 1996, housing costs in the Commonwealth have risen at a rate above the national average.
In the twelve months ending September 30, 1999, the Repeat-Sales Home Price Index1 for
Massachusetts rose 1 1.5%, compared to 5.9% for the nation as a whole.

Housing Price Growth

Annual Percent Change in Repeat-Sales Home Price Index

Source: Fannie Mae and Freddie Mac

Despite these relatively rapid increases, housing supply growth appears to be stagnant. Permits
for new housing units remain at about their 1994 level and net new growth in single family
parcels between 1992 and 1998 is flat at about 12,500 per year. The new housing that is being
built tends to be at the higher end of the market, and the number of multi-family developments is
actually declining. This decline in multi-family developments exacerbates the affordability issue,
particularly since renters typically have lower incomes than owners. In additional, single family
development is less dense than multi-family development and more likely to lead to urban sprawl.

Total Housing Permits Authorized Relative to 1980

Housing Units. Seasonally Adjusted. 1980=100

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100

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1960 1991 1982 1983 1994 1995 1998 1987 1988 1989 1990 1991 1992 1993 1994 1995 1998 1997 1998 1999

Source: US Department of Commerce

The Repeat-Sales Home Price Index measures the annual rate of price change for sales of the same
homes, thereby isolating market effects from price changes caused by changes in the mix of houses sold.

Administration and Finance
Policy Brief Series

Housing and Community Development

While the growth in housing costs is nowhere near the level it reached during the speculative
boom of the 1980s, greater gains in housing supply would moderate the current rise in housing
costs and avoid even greater spikes in the future. Without additional supply, housing costs may
continue to accelerate, imposing a stiff burden on Massachusetts renters and homebuyers as well
as decreasing the state's overall economic competitiveness. Encouraging Massachusetts localities
to permit more residential development is critical to bringing more units onto the market.

The Effects of Local Restrictions on Housing Development

According to Anthony Downs, an economist with the Brookings Institution, "the restrictive
behavior of local governments - expressed through their various regulations - is by far the most
important single cause of high housing costs.""' Nationally, barriers to residential development
take two general forms: 1) ordinances requiring inflexible construction standards and minimum
structure sizes and 2) ordinances requiring low residential densities. Minimum standards for
both construction quality and density are necessary to protect the safety, health, and quality of life
of residents and communities. However, research by Anthony Downs and the Advisory
Commission on Regulatory Barriers to Affordable Housing established by the United States
Department of Housing and Urban Development (HUD) in 1990 indicates that local ordinances
often mandate standards for new development that are well in excess of those under which most
of the country's homes were built. For instance, most suburbs in the United States prohibit
residential densities in excess of 10 units per acre even though many parts of the country have
high quality housing at densities of more than 35 units per acre. Many communities in suburban
Chicago do not permit manufactured housing, increasing the minimum cost of home building. At
the end of the last decade in King's County, Washington - which was, and still is, one of the
hottest real estate markets in the country - more than 1,500 square miles of land were zoned to
allow only one house per every five acres of land.

Anthony Downs attributes over half of the cost of building new housing to local regulations that
are in excess of minimum requirements for health and safety.6 The Advisory Commission on
Regulatory Barriers to Affordable Housing reported in 1991 that "the Commission has seen
evidence that increases of 20 to 35 percent in housing prices attributable to excessive regulation
are not uncommon." Writes William A. Fischel of Dartmouth College: "A number of studies
have been done [on regulatory growth controls], and almost all of them conclude that growth
controls raise housing prices." His review of these studies indicates that such controls raise
housing prices by 8% to as much as 38%.

Margery Austin Turner and G. Thomas Kingsley, "Housing Markets and Residential Mobility," 1993,
The Urban Institute Press: Washington, DC, p. 261

"Residential Density" refers to the number of units per acre.

Margery Austin Turner and G. Thomas Kingsley, "Housing Markets and Residential Mobility," 1993,
The Urban Institute Press: Washington, DC, p. 262

The Advisory Commission on Regulatory Barriers to Affordable Housing, "Not in My Back Yard:
Removing Barriers to Affordable Housing," Report to the President, 1991, p. 2-7

Margery Austin Turner and G. Thomas Kingsley, "Housing Markets and Residential Mobility," 1993,
The Urban Institute Press: Washington, DC, p. 263

The Advisory Commission on Regulatory Barriers to Affordable Housing, "Not in My Back Yard:
Removing Barriers to Affordable Housing," Report to the President, 1991, p. 1-1

Q

William A. Fischel, "Do Growth Controls Matter? A Review of Empirical Evidence on the Effectiveness
and Efficiency of Local Government Land Use Regulation," Lincoln Institute of Land Policy, 1990, p. 29

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Administration and Finance Housing and Community Development
Policy Brief Series

Environmental Affairs
No. 5. January 31, 2000

Restrictions on Housing Development in Massachusetts

In Massachusetts, developed land now has less than half the population density (4.97
persons/acre) than it had in 1950 (11.19 persons per acre).9 Between 1950 and 1990, the amount
of developed land increased at a rate greater than six times population growth.10 One of the
reasons for this precipitous drop in density is the imposition of regulatory barriers that require
significantly more land to build a unit of housing. For instance, many Massachusetts
communities require not only minimum lot sizes of an acre or more, but also minimum setbacks
for the buildings, minimum front yard area, minimum lot widths, and minimum setbacks for
parking. Accessory, or "in-law," apartments are often prohibited. Forty-five communities in the
Commonwealth have adopted explicit growth rate by-laws that limit the construction of new units
to as little as 50 per year. Of sixteen communities reviewed in depth by the Executive Office for
Environmental Affairs (EOEA), six had adopted regulations making it impossible to build multi-
family housing in any form.

One way to quantify the extent to which these barriers constrict housing supply is to compare
how much new development is allowed on vacant land zoned for residential development to the
residential density of developed land within the same community. In the sixteen cities and towns
reviewed by the Executive Office for Environmental Affairs, current zoning regulations permit an
average development density of 0.9 units per residentially zoned acre compared to the average of
1.8 units per acre that now exists on land already developed.1 In some towns, new development
requires nearly 3.5 times the amount of land as existing development, and in only one of the
sixteen communities reviewed do current zoning regulations allow density equivalent to the status
quo. This means that current zoning regulations require much less efficient use of land relative to
existing development, adversely impacting both the costs of land and the environment.

AVERAGE

Shrewsbury

Lenox

N Adams

Dalton

Stockbridge

N Reading

Walpole

Dudley

Hampden

Agawam

Lowell

Grolon

Andover

Leominster

Fitchburg

Oracut

Allowable Development Densities

I ■ Existing Umts/Residenoal Acre DNew Development Allowable Units/ Residential Acre |

1 I
_^0

1? 4

IMi

118

08

Hiii

-I 1 5

1 2 0

1 0

1^4

|44

1102

47

000

200

400

600

800

1000

12 00

Source: Executive Office for Environmental Affairs

9 U.S. Census Data, University of Massachusetts/MacConnel Land Use Data, MassGIS Analysis

10 Ibid.

11 Executive Office of Environmental Affairs

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Administration and Finance Housing and Community Development

liiUBl'flBrmrFI

The Costs of Additional Development to Localities

There are many reasons why communities erect such high barriers to further development. Some
residents fear the character of their city or town could irrevocably change if too much
development occurs. Others believe increases in development will increase traffic congestion and
pollution. Yet the predominant concern cited to state officials is that additional residential
development will place an undue burden on local budgets. This is because residential
development often means more schoolchildren, whose education costs cannot be offset by the
property tax revenues generated by the new development. The fear that residential development
will cost communities more than they can collect in taxes is shared by local officials throughout
the nation, according to Berkeley professor Elizabeth Deakin's review of opinion surveys on
growth controls.1"

Studies by the American Farmland Trust and the Commonwealth Research Group show that these
concerns are not unfounded. These groups looked at fourteen New England towns and quantified
the costs and revenues associated with each type of land use. The analysis involved in-depth
discussions with local officials to discern how to allocate budgeted expenses and revenues among
various land uses. According to these studies, for every tax dollar that residential development
generated in the observed communities, the localities faced an average of $1.13 in costs.13 The
sample size for these analyses is not large enough to generalize them to the Commonwealth as a
whole, but they are an indication of how residential development can negatively impact local
finances.

Another way to look at the costs of new development is to isolate the effects that additional
schoolchildren will have on town finances. The 1987 American Housing Survey conducted by
HUD found that each additional unit of single family housing resulted in an average of 0.7
additional school-age children.14 Analysis by the Executive Office for Administration and
Finance of single family development and school enrollments in Massachusetts between 1993 and
1998 indicates that every additional single family unit contributes a similar number of 0.6
students to a locality's "foundation" enrollment.15 After factoring out the average tax assessment
on a moderately priced home and the additional state aid each new enrollment can be expected to
generate, every additional single family home could cost a community approximately $1,500 in
unrecovered education expenses alone.

12

William A. Fischel, "Do Growth Controls Matter? A Review of Empirical Evidence on the Effectiveness
and Efficiency of Local Government Land Use Regulation," Lincoln Institute of Land Policy, 1990, p. 33

The American Farmland Trust, "Does Farmland Protection Pay? The Cost of Community Services in
Three Massachusetts Towns, 1992; Commonwealth Research Group, "Cost of Community Services in
Southern New England," 1995

The Commonwealth of Massachusetts Department of Housing and Community Development, "The
Growth Impact Handbook: Ways to Preview Your Community's Future," 1998, p. 57

'Foundation Enrollment" is the number of students for which a school district is financially responsible.

L5

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Administration and Finance
Policy Brief Series

Housing and Community Development

Environmental Affairs
No. 5. January 31. 2000

Additional Education Expenses Associated with Single
Family Housing Development

For Illustrative Purposes Only

r

Average Annual Education Cost Per
Pupil in the Commonwealth

Additional Pupils Due to a New Single
Family Unit

Expected Additional Education
Expense Due to a New Single Family
Unit ($7,000 * 0.6)

Less: Anticipated Tax Revenues From
a $150,000 Home (0.017 Average
Property Tax Assessment * $150,000)

Less: Additional Education Aid From
New Students - Assuming District is
Above Foundation ($150 Required
Minimum Aid * 0.6)

Annual Unrecovered Education Costs
for a New Single Family Housing Unit

$7,000
0.6

$4,200

$2,550

$90

$1,560

Cities and towns at the foundation funding level16 will receive more state aid for each additional
student, but they will also be less wealthy and have lower anticipated tax revenues per unit.
Moreover, the above calculation does not take into account the costs of funding non-education
services for the community's new residents, such as new roads, sewers, and public safety.

Impacts on Urban Sprawl

Barriers to residential development do not only limit housing supply and therefore increase
housing costs; they also have the self-defeating effect of increasing sprawl. As Anthony Downs
argues: "Each locality's success at reducing future growth within its boundaries merely shifts that
growth to some other part of the region. . The more localities within a region adopt policies that
reduce their own future population, the more likely that growth will shift outward towards the
edge of the region and thus, the greater the degree of future sprawl there."17 This will also mean
more traffic in total, more costs for highway and mass transit construction, and more regional
pollution. In some cases, traffic within towns with high barriers to growth may increase as
commuters pushed to towns further out drive through the more exclusive communities on their
way to the urban core. The efforts of each town attempting independently to minimize growth
and congestion within its borders may result in sprawl increasing in the region as a whole. Few
towns would then realize any benefits from their actions.

16

The Foundation Funding Level is the minimum level of educational funding per student required by the
Education Reform Act.

1 Anthony Downs, "Some Realities About Sprawl and Urban Decline." The Brookings Institution, 1999, p.
4

Administration and Finance
Policy Brief Series

Conclusion

Housing and Community Development

Encouraging towns to reduce barriers to development is a critical element in any strategy for
increasing housing supply and controlling housing cost growth. Massachusetts already has one of
the more proactive "inclusionary" zoning laws in the country in Chapter 40B, enacted in 1969.
This law allows a Zoning Board of Appeal (ZBA) to issue a "comprehensive permit" that

1 8

overrides local zoning and other ordinances to permit "affordable" housing development.
Where less than 10% of a community's housing stock is listed on the state's Chapter 40B
Subsidized Housing Inventory,19 a developer can appeal an adverse ZBA decision to the
Commonwealth's Housing Appeals Committee. Yet after thirty years, more than 93% of the
Commonwealth's communities have yet to meet the 10% affordability threshold.

To complement this "stick," communities need a "carrot" that will eliminate the fiscal
disincentive at the local level to permit residential development, particularly moderately priced
single-family and multi-family units. Specifically, communities want to be held harmless for the
potential increases in the demands on the local school system that new moderately priced housing
will impose. Communities can support the additional costs associated with higher priced homes
through the higher property tax revenues such homes generate, but they have difficulty sustaining
services to families moving into moderately priced homes or multi-family apartments. Therefore,
the Cellucci/Swift Administration is redirecting $47 million in local aid currently distributed as
Additional Assistance to communities where low- and moderate-income residential development
occurs. These funds will help offset the negative financial impact of residential development on
communities. Priority for other state assistance, such as open space, transportation, and
community development grants, will also mitigate the other perceived negative effects of greater
residential development such as more traffic and pollution.

Ultimately, opening up the Commonwealth's housing market is as fundamental to the continued
success of the Massachusetts economy as it is essential to the many families struggling to find
permanent homes. Without more housing opportunities, talented people will no longer be able to
move to or continue living in Massachusetts. All communities have a stake in ensuring this does
not happen. The State stands ready to support those communities willing to be part of the
solution.

IS

For these purposes, "affordable housing" refers to housing with use restrictions as defined below.

For a development to be qualified for inclusion in the Chapter 40B Subsidized Housing Inventory, long-
term use restrictions must require at least 25% of its units to be available at below-market prices or rents to
households at or below 80% of area median income. In qualified homeownership developments, the
Subsidized Housing Inventory counts as "40B units" only the units deed-restricted for income-eligible
residents. In qualified rental developments, all units, including those not restricted for low- or moderate-
income households, are counted as 40B units. While it is not an exact or complete inventory of all
affordable housing, DHCD believes that the 40B Inventory is a good proxy for identifying communities
with concentrations of affordable housing stock.